EU hedge fund law to raise compliance costs-survey

* Compliance cost 1.3-1.9 bln euros in first year

* Ongoing cost of 689-985 mln euros

* Private equity firms say returns could suffer

LONDON, Sept 21 (Reuters) - A controversial EU draft law on hedge funds and private equity could initially cost the two sectors between 1.3 billion euros ($1.9 billion) and 1.9 billion euros, while investor returns could also suffer, a survey says. The survey by think tank Open Europe says the Alternative Investment Fund Managers directive -- draft rules to control leverage and where funds are sold -- could also lead to ongoing costs of between 689 million euros and 985 million euros as firms act to comply with the new rules.

The rules, which could be adopted in 2012, are designed to try and prevent further crises but have come under heavy criticism from the hedge fund and private equity industries, as well as some investors, for imposing what they see as unnecessary burdens.

Stephen Burke, managing director of consulting at compliance specialist IMS Consulting, told Reuters that small firms could face costs of as much as 100,000 pounds ($161,800) for legal fees to redomicile funds and changing internal processes to comply with the directive. The survey also said that the hedge fund and private equity sectors contributed around 9 billion euros in tax revenue to the EU economy last year and employ an estimated 40,000 people in the bloc. “Unless a range of amendments take place the AIFM directive will impose substantial costs across the board, without offering sufficient benefits for the industry, investors and the wider economy,” Open Europe said in the statement. “In a worst-case scenario, thousands of jobs and millions in tax revenue could be at stake.”

The survey also said European investors’ choice of funds to buy into could be cut by up to 80 percent as a result of the directive, which proposes barring non-EU fund managers from marketing their products in the region unless the host countries have equivalent rules. Institutional investors such as Hermes and Universities Superannuation Scheme have already criticised the directive for potentially limiting choice. [ID:nLH713844]

However, supporters of the directive point to a facility to “passport” funds, allowing them to be sold throughout the EU once they have received approval.

The survey added that some private equity managers have said returns could fall by 1-to-2 percent, while some managers have said this could be as high as 5-to-10 percent.

Meanwhile, 2 percent of investors said they viewed the draft directive favourably while 46 percent viewed it unfavourably. A further 46 percent viewed it neither favourably nor unfavourably, while 6 percent said they did not know.

“When only two percent of investors believe a directive will improve investor protection it is clear that it will be counterproductive,” said Simon Walker, chief executive of the British Venture Capital Association.

The survey was carried out last month and covered hedge fund managers running $342 billion and private equity managers controlling more than $204 billion. (To read the Reuters Hedge Fund Blog click on; for the Global Investing Blog clickhere) (Reporting by Laurence Fletcher; Editing by David Cowell) ($1=.6802 Euro)